Fake Financial News could worsen financial illiteracy

My first introduction to the financial world was through a teacher in College (Business Law subject) in my 4th year of engineering. It was also at that time that I started blogging. Since then, I have tried to self-learn all about personal finance, investments, insurance and so forth.

After immersing myself for years of self-learning, I finally gained the courage to start investing with the money I saved. I ended up being scammed a couple of times; through a so-called “revolutionary financial product” which I thought I needed, an encounter with a profit-driven financial advisor and was also pumped-and-dumped in the stock market. This resulted in a combined over-six-figure loss (Php120,000+) – this was a very harsh introduction to the dark side of the personal finance industry.

It took a couple of years for me to start-over and start re-learning. All of this was the result of not just a lack of knowledge or wisdom on my part but also due to financial misinformation, which I realized later on. As the saying goes – “Experience is the best teacher.” But I absolutely don’t want others to through that experience either, this led me to write about personal finance – as I wanted to educate more people.

This past year, news and social media have been abuzz about the proliferation and effect of fake news. But fake news is old news. The dictionary defines “fake” as something that is designed to deceive or cheat; not real; counterfeit. Using this definition, fake news isn’t a new phenomenon.

Financial markets have been dealing with hoaxes, frauds and fake news for a long time. The wrong response as I experienced myself can be costly. In the past, faxes and message boards were used to defraud investors. Now we have the internet, facebook, twitter and the like social platforms.

Fake news is a term that often applies to completely fake news stories written to fool people, or twist information to benefit a particular individual/group's agenda (Be it propaganda, to damage reputation and so forth). Misinformation might be a better term to use, although for now, it's "fake news."

Many people have enough problems already in trying to figure out where to invest, how to avoid fees, whether to refinance mortgages and a slew of other money topics without fake financial news adding to the mix. Believing fake news as real news can have adverse effect on financial decisions – it can keep us from making wise investments and other money related decisions.

Understanding Fake Financial News

Many investors have been fooled into believing that keeping up with today’s financial headlines is a prerequisite for achieving their financial goals. But separating the fake news from actionable information is a daunting task for investors.

Pump(Hype)-and-Dump – one of the most common scheme that happens everyday in the stock market. It goes like this: buys shares in a thinly-traded, low-priced stock, then spread stories or rumors (via email, forums, social media all over the internet) telling people it is about to increase in value 10-fold (or more) as its technology/market/expansion/etc. is on the verge of some breakthrough.

Various gullible recipients as well as investors responds by buying the stock which push the price up which brings in even more buyers at which point the scammers sell out or ‘dump’ the stock. This can be taken further through hiring writers to post fake news articles online that ‘hype-up’ the company stock without disclosing that the writer was hired or paid by the company.

The PSE – Philippine Stock Exchange is not exempted from this scheme, and is not limited to IPO's, penny stocks or any stocks.

Speculative Headlines/Statements – A headline has more chance to be successful if the sentiment expressed in its text is extreme. This can be used in many ways such as:

Fake Press Releases – This could be used by a company to project positive image, “Company X plans to invest billions in economic zone development”; with our reducing attention spans, you probably will just accept the headline and won’t read further in the article. But the title is very speculative since it is talking about the future. It has not happened yet. It’s calculated to stir up emotions, excitement and bias – they let people engage in mass mischief to their benefit.

Fake Market Research – Investors would be wise to exercise caution about news articles talking up perceived ‘hotspots’ that are (allegedly) ripe for a quick burst of capital growth. The people spreading the information could have a vested interest to promote a particular property development because they have a business there or they have a real estate project up for sale.

Watch out for pranks or spoofs – Some authors and websites specialize in parody or writing satire articles that are not meant to be taken seriously. Unfortunately, some readers do take the content seriously and may even base life/financial decisions on it.

When you see phrases such as "leading analyst says share price set to triple", "don't miss out, stock to soar", “Invest in this limited opportunity” or somewhere along those lines; you need to approach it with skepticism and due diligence since you need more information in order to determine whether the content is real or fake.

Why are we prone to Fake (Financial) News?Confirmation Bias – is the tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses.

Implicit Bias – refers to the idea that as humans, we have a tendency to group people into categories. We are inclined to trust people we consider a member of our own group more than those of a different group. The word implicit indicates that it is a bias that influences us without our knowing it.

This is one of the reasons why we need others to help call us out, especially members of groups to which we don’t belong for they can perceive our biases. This is also how scams easily spread since we tend to let our guard down towards our friends, thereby weakening our filters.

Not Asking Questions – As far as I can remember, only a few students would ask questions every lecture when I was in school (Elementary, High School, and College). The way we educate our younger generation (of not asking questions) has contributed to why we easily fall for fake news today. We are taught to learn and absorb information but not how to filter it.

Photo Credit: mediamatters.org

Filtering Fake Financial News
After a decade of self-learning and reading A LOT of content (articles, blogs, videos, podcasts), I have learned some things that could help in distinguishing fake financial news.

Power of Pause – Pausing allows us to take a breather – as everyone else is rushing around like lunatics. Are your feelings, thoughts and actions aligned? This allows us to think what might be the better choice for yourself right now.

Check your emotions – Clickbait and fake news strive for extreme reactions. If the news you're reading makes you really angry or really excited to share, it could be a sign that you're being played.

Question everything –

Who made this? Who is the target audience?

When was this published?

Who paid for this? Or, who gets paid if you click on this?

Who might benefit or be harmed by this message?

What is left out of this message that might be important?

Is this credible (and what makes you think that)?

Is the URL unusual? “.co” “.me” and so forth

Things you can do –

Always try to check the ‘about us’ section in site that hosts the article, to determine if they are anonymous or being transparent.

Too good to be true? Remember that if it sounds too good to be true, it most likely is, and this definitely applies to fake financial news

Be suspicious of headlines making bold claims and articles with poor grammar, multiple typos and unnamed sources.

Check to see if certain articles are labeled as sponsored content or advertorials. These stories might not be fake but often will present a favorable slant on a financial topic or product.

Investors need to distinguish between the empty calories - gossip, rumors, idle speculation - and instead, focus on what is genuinely useful. Fake news may be foolish, but your reaction to it doesn't have to be. Fake Financial news preys on our own ignorance and biases for profit.

Using the news as a sole source of investment analysis is a common investor mistake which could lead you to being scammed, or as mentioned earlier hyped-and-dumped. Don't base your investment decisions on social media, period

Before you make any financial decision based on what you're hearing in the media, the safest course of action is to also solicit an opinion from a trusted professional.

After all, even if the news is accurate, and it's a good time to buy a house or purchase stocks, that doesn't mean it's a good time for you. Different people will need different strategies since they naturally have different financial capacities and goals.

Hopefully this post could help guide you in identifying Fake Financial News!